What's going on, everybody?
I called this morning's I'd Trade That "The Spring Is Loaded." The bond market, the oil market and the chip market are all wound up tight at the exact same time, and I named three dates that could let it go.
Two of those dates have now come and gone, and the spring's still loaded. Further down, I'll show you where I'm stalking what could be one of the best trades of the year, and why today's action only makes me more patient.
You can watch today’s show here or scroll down for the wrap up:
The first one hit at 8:30 this morning with PCE (the Fed's preferred inflation gauge). Headline inflation ran 3.4% year over year and core came in at 3%, both under forecasts. Odds of an October rate hike fell to about 37%.
So is the market celebrating 3% core inflation? No. It's celebrating the change in the inflation trajectory.
Short-term yields dipped on the news. The 10-year? It climbed to its highest level since April 2002.
Stocks gave back their gains in the final half hour. The S&P closed down 0.2%, and the Nasdaq finished up 0.2%.
Out on the Water
Trend-following funds (CTAs, which buy and sell on rules, not opinions) sit about 99% of the way to their maximum short on the 10-year Treasury. They keep selling until the trend breaks, and at some point, it's going to break. A cooler inflation print didn't break it today.
Pull up the iShares 20+ Year Treasury Bond ETF (TLT) on a daily chart and add Bollinger Bands (lines that show how far price has stretched from its average). TLT sits around $78, deep into the third standard deviation, with short positioning at the 99th percentile.
What goes down will come up at some point. But I'm not asking you to be first over the wall.
The cleanest place to play it is the 20-day moving average. When price gets back above that line, set tight stops and look for a run toward the upper band, where forced covering starts. When it comes, it'll come quickly and it'll come violently.
We've seen $4 and $5 squeezes. We don't need to make the first $2. We want to make the next three.
A speculator says, "I'm going to buy the TLT $80 call for October, and I don't know what the math even tells me here." Okay, well, good luck with that, because this can go on a lot longer and you could be very early.
A trader waits for confirmation. Let's see volume run to 120% of normal to the upside before I call this a real move. If you want to speculate anyway, define your risk: buy the at-the-money call, sell the 80 against it, and set a stop.
So every morning I go out on the water and ask, is it here? I don't hear anything slapping around. Okay, what else we got?
The chain I'm waiting on goes like this: oil down, yields down, bond shorts cover, utilities squeeze, equities follow. Right now, oil's fallen without pulling yields down, so the first link hasn't caught.
Find a Captain
There are two barrels of oil. The paper barrel is the futures contract you and I trade from our desks. The physical barrel is the one where you call a refinery, get a ship, get insurance and maybe find a captain willing to sail through missile fire.
West Texas crude hit a four-week low near $89 on Tuesday and closed today back above $90, with Brent near $98. Oman's official price for November? $114, up from $87 last month. Paper says be calm, and physical says I'll pay up to get it.
Why? Crude flows are back near pre-war levels, but exports of refined products like diesel and jet fuel run somewhere around 58% to 60%. You can't run a truck on crude.
Calls, which pay if oil spikes, now cost less than they did before the war. When insurance against a spike is cheap and the risk is live, a call spread (buy one call, sell a higher one to cut the cost) is the defined way to own it.
Meanwhile, Iran wants Hormuz and the blockade settled before nuclear talks even start, and Washington and Tehran still have nothing to show for it. The paper barrel is pricing a deal that negotiators don't sound like they believe in.
A Soda Straw for a Fuel Line
Micron (MU) makes the memory that feeds AI chips, and an AI chip without enough memory is a sports car with a soda straw for a fuel line.
On the show, I said the quarter doesn't really matter and the guidance does. The bar I laid out this morning was $56 billion in revenue and $35.71 in earnings per share. After the bell, Micron guided to $61.5 billion and $38.15.
The contracts came in too. Micron has signed 26 multi-year deals it estimates at more than 35% of revenue through 2030, and most of the priced ones carry floors and ceilings.
Memory has always been a boom-or-bust business. Price floors turn it into something closer to a utility.
Options priced roughly a 7% move, about $75. As I write this, Micron has barely budged after hours while investors chew on plans to spend a lot more on new fabs next year.
That's why I told you to skip the options into earnings and not hold an earnings play overnight. Anyone who paid for a $75 move is holding a fraction of it.
Tomorrow, wait 15 minutes, anchor VWAP (the average price weighted by where volume traded) to the open, and look for the bounce. For the next two to three weeks, I'll anchor VWAP on the SPY and the Qs to the moment Micron reported.
Keep an eye on NVIDIA (NVDA), too. It's up only about 2% in September while AMD and Intel ran 35% or more, and it just added $150 billion to its buyback. It closed at $228, below the 233 level I flagged this morning.
I'm also long Tradeweb (TW), which collects a fee every time institutions trade bonds in a $32 trillion Treasury market.
We just need a trigger. Micron didn't pull it tonight, which leaves the jobs report Friday or a headline out of Hormuz.
Nothing here is over the top. It's just about understanding the probabilities of success and taking what the market gives you.
I'd Trade That,
Garrett Baldwin
P.S. I'm live every weekday at 9:20 AM ET on I'd Trade That. Come find me tomorrow when we see how the market really handles Micron.